Tuesday, August 12, 2014

While the conflict in Ukraine rages on, EU member
states have decided
to impose (not so much more stringent) economic
sanctions against Russia, which was predictably followed by
Russian counter-measures.
The question which isn't being asked often enough, is whether these sanctions
will actually improve the situation. Here's an analysis following four concrete
questions:

1. Can
things get even worse in Russia?

2. Is the
West able to guide Russia and Ukraine down the right path?

3. Can
the West contribute to a sharpening of the crisis?

4. How
can the West protect itself against this conflict?

1. Can
things get even worse in Russia?

Of course. That answer may seem evident, but many analysts
implicitly assume that there really are no worse alternatives for the Putin
regime. That Russia has an authoritarian regime, is an understatement. At the
moment there even is a power
struggle ongoing between Kremlin hardliners and business
leaders, according to the BND, Germany’s intelligence service. Nevertheless,
Putin is some kind of a moderate in Russia, at least when judging his approval
rate, which would be around
80%, the highest in six years. Even if Putin's real domestic
support would be a lot less strong in reality, it's clear that there are a lot
of radical
alternatives. Putin doesn’t mind to associate
himself with some of them, for example the ultra-nationalist ideology Aleksandr
Dugin. Such pressures on Putin partly explain aggressive
policies, like the Crimean invasion.

The primary reason for the support Putin enjoys for
his Ukrainian ventures is of course the Russian minority. Many in Russia do not
consider Ukraine to even be a country. That Russian minorities in Latvia aren't
alwaystreated
fair and equally, makes it easier for Putin to justify intervention. One of the
first measures
of the new Ukrainian government was to no longer allow Russian, the mother
tongue of about a quarter of the population, to be used as a regional
governance language, an enormous PR failure, although the measure was quickly
vetoed by interim President Oleksandr Turchynov. Recently, the Ukrainian
government has banned Russian
films and the Communist
Party. The latter convinced 13% of the electorate in 2012
and supports decentralisation of the country. Its stronghold is located in the
South East, where a lot of Ukrainian Russians live,
and it has spoken out against the military offensive of the Ukrainian army,
which was recently also criticised
by Human Rights Watch for killing 16 civilians with unguided rockets.

As a result, it could be expected that Putin would
intervene, although perhaps not by eurocrats like European Commission President
José Manuel Barroso. During the negotiations on the EU-Ukraine Association
Agreement, the EU basically forced
the divided country to choose between Russia and the EU. Barroso himself stated
in February 2013: "One country cannot at the same time be a member of a
customs union and be in a deep common free-trade area with the European Union,",
referring to Putin's Eurasian
Economic Union. That's the result of the general lack
of flexibility the EU employs in its relations with non-EU member
states, something which certainly has playeda
role in the worsening of this crisis. A similar
all-or-nothing framework has contributed to worsening relations with Turkey.
The Commission had a mandate to conduct trade talks with Ukraine, but basically
used this to conduct foreign policy, even challenging
the Kremlin. This annoyed EU member states, which meanwhile have taken over, pushing
the EU's High Representative for Foreign Affairs, Cathy Ashton, aside. The EU,
which is strongly divided,
should stay away from foreign policy as far as possible, certainly with regards
to the sensitive relationship with Russia, where a risk of escalation is
certainly present. After a monster fine of $50bn was imposed on Russia for
nationalising Yukos, the Financial Timesquoted
an anonymous source close to Putin saying: “There is a war coming in Europe…Do
you really think this matters?”

2. Is the
West able to guide Russia and Ukraine down the right path?

The West could at least try not to make matters worse.
Despite the mistakes which were made before the crisis by the EU, it sent an
appropriate signal by unilaterally
abolishing a few trade barriers for products from Ukraine. This angered
agricultural lobbyists in Brussels, always happy to impose costs
on consumers or taxpayers.

Unilateral
opening of borders for trade is only a bad thing for
those who think that trade "costs" something. The opposite has been
proven over the centuries. Certain producers with good political connections in
protected economic sectors may of course face more competition, but consumers
enjoy lower prices and more freedom to choose, and that's
what counts.

The opening
to China made by US President Richard Nixon probably was the most succesful
example of foreign policy in the second half of the 20th century, along with the
treatment of post-war Germany. Without waiting for China to abolish its protectionism,
such as the obligation
for investors to enter into "joint ventures", the U.S. allowed entry
for Chinese products. About half
a billion Chinese were lifted out of extreme poverty in less than 40
years and Western consumers enjoyed lower prices. On its turn, this helped to
deal with factory closures in Western economies which can only partly be blamed
on foreign competition. Excessive regulation and tax pressure are the real
culprits, also preventing the creation of sufficient new enterprises to replace
the disappearing old industry.

On the long term, there is only one strategy which has
proven to be succesful: opening borders for trade. That Ukraine wants to leave
the Russian sphere of influence, is in this respect no coincidence. The country's
economy is less
dependent on natural resources (5%) than for example
Kazachstan's (32%). An independent critical middle class only emerges in
countries where it's hard for the government to get a grip on the economy. It
never emerges when the regime merely needs to control the natural resources and
no significant economic activity outside of governmental control exists.

3. Can the
West contribute to a sharpening of the crisis?

As explained, the West could open its borders for
trade with Ukraine and Russia, in order to support the development of a
critical middle class on the long term. That would be a modest but effective
contribution to the situation in societies which are hard to influence from
abroad.

For Western countries, it’s however also perfectly
possible to make sure that the crisis deteriorates. There is a policy which
fails time over time, apart from the odd occasion when it works, just like a
broken clock works twice a day: economic sanctions.

- North Korea, more an open air prison than a country,
is still isolated. Years of sanctions
have prevented a Chinese or Vietnamese scenario, with gradual liberalisation
which also profits the regime, thanks to the gains of external trade.

- Also in the case of Iran and Libya under Gaddafi did
sanctions
prevent a real improvement of relations with the West. They failed to undermine
the regime domestically, on the contrary. That's a pity because the
"Persian nation" should be a more natural ally in the region than
Saudi Arabia, which is even less secular and because Libya harbours the biggest
oil reserves in Africa. Anyhow, understandable aversion against the two regimes
has been trumping all other considerations. The illusion prevailed that
blockades and force could convince countries without any democratic tradition
to adopt better practices.

- Sanctions
and wars,
the former’s continuation by other means, against the Iraqi tyrant Saddam
Hussein, have resulted in turning one of the most secular countries of the
Middle East into a true hellhole where the "Islamic
State", a group even more murderous than Al-Qaeda,
controls large parts of the territory.

- Then we even haven't discussed Cuba.
It's simply a
waste of time to explain why the country would for long have been
flooded by American investment and capitalism if the senseless embargo against
the economically and morally bankrupt Castro-regime would have been lifted.

- Sanctions against South-Africa, which were supposed
to help end apartheid, were introduced in 1963. That was 30 years before the
system was abolished, meaning that the link between sanctions and the end of apartheid
was weak at best. Some analysts contend
that the sanctions even proved to be a boon for the ruling regime. ARMSCOR,
the government's arms procurement agency, was established primarily as a
response to the sanctions and developed a capability which far exceeded South
Africa's requirements. Because of the many jobs dependent on it, the regime would
have enjoyed support from a key constituency that directly benefited from the sanctions.

- The policy also failed in Zimbabwe. Sanctions introduced
in 2002 targeted the regime of the grim dictator Robert
Mugabe. He’s infamous for taking up the policy of "quantitative
easing" a little too enthusiastically, subjecting his
population to a period of hyperinflation.
He’s still in
charge, throwing parties while unofficially unemployment data
would be above 90%. This year, the Belgian ambassador to South Africa, Johan
Maricou, demanded an end to the sanctions, explaining
that "they are counterproductive, because Zimbabwe's regime uses them to
explain everything which goes wrong in the country."

- A last example is Burma, where it took 20 years
after sanctions
were introduced before things started moving in the right direction. The regime
introduced liberalization, reacting to domestic
protests from 2007 on. No link with the policy of sanctions can be witnessed.

Despite
the many failures of economic sanctions, everyone is of course free to believe that
this time around, it will be different.

In a comment
in support of economic sanctions, The
Economist - the newspaper which in
1854 was still railing against those attempting to stir up
war in Crimea - was only able to cite a few obscure succesful examples of the
policy. One is how it would have forced Iran back to the negotiating table
during its recent cyberwar
with the U.S., to discuss its nuclear programme. That sanctions have motivated
Iran, is not
certain at all and either way no improvement in the Iranian
relationship with the West can be witnessed since 1979, when the Ayatollahs
rose to power and the U.S. imposed
sanctions.

Research
by academic Gary
Clyde Hufbauer investigating all economic sanctions since 1914,
concludes that these only "work" in 34% of cases, while they only succeeded
in 20% of occasions to disrupt relatively minor military adventures where that
was the goal. Those who favour the current measures against Russia should
reflect upon the researcher’s findings that apparently, politically or economically
weak countries are more vulnerable and that the more sanctions cost the country
imposing them, the less likely it is that they will succeed. To do nothing is
indeed sometimes better than "to do something", certainly when it's
likely that the latter would make the situation even worse.

When Putin became President again, he made it into one
of his goals to "nationalise
the elite", thereby forcing those in his inner circle to sell off foreign
assets, so they would be less vulnerable and more loyal in case of
international tension. None of the five or six former KGB-cronies in Putin's
inner circle would still have any foreign assets.

Is there anyone who believes that Russian
oligarchs, the only ones who still may have a certain degree of
independence from Putin to speak out, would try to stop him if they would no
longer have any more assets abroad? Mark Champion, the former bureau chief of
the Wall Street Journal in Brussels, points
out that if tough measures against Russia would be
decided, "any future land grabs would incur smaller additional costs for
Russia." American think tank Brookings Institution warns
that Putin himself rowed back from modernizing Russia's economy from 2012 on,
instead pursuing deluded goals as import substitution and autarky, a policy
likely to be accelerated in case more sanctions are imposed. Tony Brenton, the
former British Ambassador in Moscow, sums
it up nicely: "The pressure on Western governments to “do
something” has become acute (...) Economic sanctions (...) won’t work. We will
have to negotiate with Vladimir Putin (...) In countries as prickly as Russia,
sanctions simply strengthen the forces most hostile to the West. It has even
become a badge of patriotic pride among senior Russians to be on the sanctions
list. Every new round reinforces Putin’s standing with the public as their
champion against a predatory West."

Perhaps it is also useful to quote Vladimir Putin
himself. According to a biography published in 2000, he once
stated: “You should never drive a rat into a corner."

Obviously, sanctions would succeed in damaging the
Russian economy. According to Alexei
Kudrin, who served as Putin's Finance Minister for eleven
years, the Russian economy could collapse
in six weeks time as a result of it. Also the EU could get in trouble. Southern
European banks have
a considerable exposure to Russia. The most vulnerable is Italian bank
Unicredit, which also helps to explain the stance of the Italian government.
Russia exports more to the Netherlands
than to any other European country (16% of Russian export, mainly because
Rotterdam serves as Russia's port to transferits
oil to world markets, as Russia doesn't have an ice free
port). Either way, recent data show that the German economy, the motor of the
continent, already
suffered economic damage as a result of the tensions.

4. How
can the West protect itself against this conflict?

The answer to this question naturally depends in the
first place on whether this is an internal Ukrainian conflict, whether it's a
Ukrainian-Russian war or whether there is a serious danger for the conflict to
expand to Moldova or even the Baltic states, and to what extent this ultimately
endangers security and stability in Western Europe. This issue raises the
question whether it was such a good idea after all to adopt the Baltic states
into NATO, and why a country like Finland isn't
keen at all to join NATO, regardless of the isolated opinion of
its new EU-federalist Prime Minister Alexander Stubb, who has also warned
that sanctions would hit his country economically.

This issue leads us to comparisons between on the one
hand Finland, which has a rather neutral, stable relationship with Russia, and
on the other hand Poland and the Baltic states, who address Russia in a rather aggressive
way, despite their strong energy-dependence
from the country, hoping that their NATO - membership is more than just a piece
of paper. At least Polish Foreign Mininster Radosław Sikorski seems to think it
isn't. In a secret
recording which was being leaked - perhaps by Russia, to undermine
NATO cohesion - he stated: " "You know that the Polish-US alliance
isn't worth anything (...) It is downright harmful, because it creates a false
sense of security ... Complete bullshit. We'll get in conflict with the
Germans, Russians and we'll think that everything is super, because we gave the
Americans a blow job. Losers. Complete losers [, that's what we are]."

It's a good thing that these questions are being
asked, because sooner or later we'll have to debate it. To give a clear answer,
is however difficult, because it all depends on how public opinion in the West
thinks about this, and what can be described as "the West".

In my humble opinion, we can’t say there is any
aggression against the West in the current conflict, certainly now that the
U.S. have declared
not to have any evidence of a direct Russian link to the attack on the
Malaysian plane.

A majority
of the population in Germany and Italy is against Ukrainian NATO - membership,
so there isn't democratic support in Western Europe to defend the country in a
military way. Only in 2010, 93%
of Ukrainians said they regarded Russia in a positive light, which was six
years after the Orange Revolution where anti-Russian sentiment was present. Now
things are likely to be different, but it's hard to argue that this
"conflict between brothers" can be described to Westerners as
"our war".

A policy of non-intervention isn't necessarily the
same as naive pacifism. It's clear that this conflict could have a lot of
indirect consequences for Europe and NATO-countries, which should at least lead
to major attention for the efficiency
of defense spending. It’s even clearer that any intervention in this conflict
is extremely risky.

Diplomacy and maintaining effective defense
capabilities can be the only answers. That's ambitious enough. Perhaps the way
in which a country like Finland deals with Russia can offer lessons. Then I
don't refer to "Finlandisation",
which meant that the Soviet Union was involved in every major decision in the
country, but to the policy
after 1991. Since then, Finland clearly has sided with the West,
but it has also maintained a good commercial relationship with Russia, not
suffering from the illusion that it is capable of shaping Russia into the model
its desires, otherwise than through trade, indirectly.

"Neo-conservatives" offer the ideological
framework for economic sanctions and military interventions and would stem from
reformed Trotskyists,
who may no longer believe in bureaucratic planning of the economy but still
think social engineering is possible in foreign policy. After the disastrous
adventures in Iraq, Afghanistan
and Libya,
they should now grab the opportunity to remain silent. Sanctions and
confrontation are dangerous. It is time for realpolitik.